- 19-Apr-2025
- Healthcare and Medical Malpractice
When a company enters insolvency proceedings, it triggers a series of legal and financial processes that can significantly impact its shares. The treatment of company shares depends largely on whether the company is undergoing a Corporate Insolvency Resolution Process (CIRP) or is being liquidated under the Insolvency and Bankruptcy Code (IBC). Shareholders and investors in the company need to understand how insolvency affects the value, trading, and ownership of shares during these proceedings.
When a company enters CIRP, the Resolution Professional (RP) takes over the management of the company’s operations, and a Committee of Creditors (CoC) is formed, largely consisting of financial creditors. During this period, company shares may continue to trade on the stock exchange, although their value is usually impacted by the uncertainty surrounding the company's future.
Shareholders still hold their equity during CIRP, but their control over the company is limited. They cannot directly influence the Resolution Plan unless they have a significant stake or are able to participate in meetings where the Resolution Plan is discussed.
The Resolution Plan could potentially involve significant share dilution or even the wiping out of existing equity holders' shares. In some cases, creditors may be issued new equity in exchange for their debts, meaning existing shareholders may lose their ownership or receive a reduced stake in the company.
Stock Market Impact: Shares may continue to trade on the stock market, but the value of the shares is often volatile and typically falls due to the risks associated with the company's financial distress.
Equity Dilution: Shareholders may experience dilution of equity if the Resolution Plan involves issuing new shares to creditors or investors. This often happens when creditors agree to take a partial stake in the company as part of the debt restructuring.
Loss of Equity: In many cases, if the company’s debts outweigh its assets, shareholders may lose their entire equity stake. If the company is restructured, creditors often take control of the business, and existing shareholders may see their shares rendered worthless.
Post-CIRP Shares: If the company is successfully restructured and returns to profitability, existing shareholders may retain some value in their shares, although this is rare. The market may react positively if the restructuring leads to a viable business plan.
If the company enters liquidation, the treatment of shares is much more severe. Liquidation means the company’s assets are sold off, and the proceeds are used to pay off creditors.
Shareholders typically receive nothing or very little in liquidation, as creditors—especially secured creditors—are prioritized in receiving any proceeds from the liquidation of assets. After all creditors are paid, there is usually no remaining value for equity holders.
If shareholders’ claims are treated as unsecured debts, they are at the bottom of the priority list, meaning they are the last to receive any payout (if any funds are left).
While a company is under insolvency proceedings, the market value of shares typically drops significantly. This is due to the uncertainty about the company’s future and the potential for debt restructuring or liquidation.
If the company is listed on a stock exchange, its shares may continue to trade; however, their prices usually reflect the company's distressed financial condition and the possibility of bankruptcy. Investors may continue to trade these shares, but many may choose to sell them off, leading to further price drops.
Trading Suspension: In some cases, the stock exchange may suspend trading in the company's shares if the company is going through insolvency proceedings or if it fails to meet certain listing requirements, especially when the company’s financial condition worsens.
Shareholders retain ownership rights to their shares during the CIRP, but their influence on the company’s decisions is limited compared to creditors. They may still be able to attend meetings or vote on certain resolutions, depending on the size of their equity stake, but they do not have a say in the resolution process unless the Resolution Plan directly affects their shares.
During liquidation, shareholders’ rights are essentially reduced to those of unsecured creditors, and they may only file claims for any remaining assets once secured creditors and other higher-priority creditors have been paid.
Under the IBC, the Resolution Plan outlines how creditors will be paid and how the company will be restructured. If the plan involves debt-to-equity swaps or issuing new shares to creditors, existing shareholders may find their ownership significantly diluted or entirely wiped out.
Shareholders may not have direct control over the outcome of the Resolution Plan because creditors, particularly financial creditors, hold the voting power during the CoC meetings. However, shareholders may challenge certain provisions of the plan in court if they believe their rights are being unfairly prejudiced.
Suppose a retail company enters insolvency and goes through the Corporate Insolvency Resolution Process (CIRP). During the process, the company's creditors propose a Resolution Plan in which they will take over a portion of the company’s equity to recover their dues.
If the Resolution Plan is approved, existing shareholders may see their equity diluted or even eliminated, with creditors acquiring new shares. This drastically reduces the value of the shareholders' holdings, and in some cases, they may lose their entire investment.
If the company fails to find a resolution and moves into liquidation, the shares of the company become worthless, as the company's assets will be sold off to pay creditors, with shareholders receiving nothing.
During insolvency proceedings, the treatment of company shares largely depends on whether the company is undergoing a Corporate Insolvency Resolution Process (CIRP) or liquidation. In CIRP, shareholders may face equity dilution, and their shares could be wiped out if creditors take over the company. In liquidation, shareholders are at the bottom of the priority list and usually do not receive any payment, as creditors take precedence. The value of shares typically decreases sharply, and the company’s stock may continue to trade with high volatility or may be suspended.
Answer By Law4u Team
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